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BCG Matrix on Cadbury

2

A different strategic and investment approach is taken for each of the four

different categories.

Cash Cows typically have large market shares in mature, slow growing

markets. Cash cows require little investment and generate cash that can be

used to invest in other SBUs/product lines.

Stars are SBUs/product lines that have a large market share in a fast growing

market. Because the market is growing rapidly, stars frequently require

ongoing investment to maintain their market leadership. As marginal

competitors withdraw and the market matures and slows down, successful

stars become cash cows and generate significant cash.

Question Marks operate in high growth markets, but suffer from low market

share. The strategic options involve investing resources to grow market share

or withdrawing. Investing to grow market does not guarantee these SBUs or

product lines will become stars and hence the term Question Mark.

Dogs. A dog suffers from having low market share in a market that is mature

and slow growing. Investment will usually have little benefit and therefore,

liquidation and withdrawal is usually the best strategy for those

SBUs/product lines classified as Dogs.

Question Marks

Question marks are products that grow rapidly and as a result consume large

amounts of cash, but because they have low market shares they dont generatemuch cash. The result is a large net cash consumption. A question mark has the

potential to gain market share and become a star, and eventually a cash cow

when the market growth slows. If it doesnt become a market leader it will

become a dog when market growth declines. Question marks need to be

analysed carefully to determine if they are worth the investment required to

grow market share.


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Market development

Product development

Joint ventures

Dogs

Dogs have a low market share and a low growth rate and neither generate nor

consume a large amount of cash. However, dogs are cash traps because of the

money tied up in a business that has little potential. Such businesses arecandidates for divestiture.

These describe businesses that have low market shares in slow growth markets.

They may well have been Cash Cows. Often they enjoy misguided loyalty from

management although some Dogs can be revitalised. Profitability is, at best,

marginal.

Strategic options would include..

Retrenchment (if it is believed that it could be revitalised)

Liquidation

Divestment (if you can find someone to buy!)

Successful products may well move from question mark though star to Cash

Cow and finally to Dog. Less successful products that never gain market

position will move straight from question mark to Dog.

The BCG is simple and useful technique for strategic analysis. It is convenient

for multi-product or multi-divisional companies. It focuses on cash flow and is

useful for investment and marketing decisions.


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One should not however, ignore the limitations of the technique.

Definition (qualitative and quantitative) of the market is sometimes

difficult.

It assumes that market share and profitability are directly related.

The use of high and low to form four categories is too simplistic.

Growth rate is only one aspect of industry attractiveness and high growth

markets are not always the most profitable.

It considers the product or business in relation to the largest player only.

It ignores the impact of small competitors whose market share is risingfast.

Market share is only one aspect of overall competitive position.

It ignores interdependence and synergy.

Cash Cows

As leaders in a mature market, cash cows exhibit a return on assets that is

greater than the market growth rate so they generate more cash than they

consume. These units should be milked extracting the profits and investing as

little as possible. They provide the cash required to turn question marks into

market leaders.

These are characterised by high relative market share in low growth industries.

As the market matures the need for investment reduces. Cash Cows are the most

profitable products in the portfolio. The situation is frequently boosted by

economies of scale that may be present with market leaders. Cash Cows may be

used to fund the businesses in the other three quadrants.

It is desirable to maintain the strong position as long as possible and strategic

options include..


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Product development

Concentric diversification

If the position weakens as a result of loss of market share or market contraction

then options would include..

Retrenchment (or even divestment)

According to this technique business or product are classified as low or high

performers depending upon their market growth rate and relative market share.

This technique is particularly useful for multi-divisional or multiproduct

companies. The divisions or products compromise the organisations business

portfolio. The composition of the portfolio can be critical to the growth and

success of the company.

The BCG matrix considers two variables, namely.

MARKET GROWTH RATE

RELATIVE MARKET SHARE

To understand the Boston Matrix we need to understand market share and

market growth interrelate.

Market share

Market Share is the percentage of the business unit sales to the total

market that is being services by your company measured either in

revenue terms or unit volume terms. In indicate the business unit strength


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MS = Business Unit Sales This Year

Total Market Size

MS= Market Share

Relative market share

Is the percentage of the business unit sales to the highest competitors

sales measured either in revenue terms or unit volume terms it indicate

the business unit strength

RMS = (business unit sale this year)

leading competitor sales this year

RMS= Relative Market Share

Market Growth Rate

Market growth is used as a measure of a markets attractiveness

Market experiencing high growth are ones where the total market share

available is expanding and threes plenty of opportunity for everyone to make

money.

MGR= (total market sales this year) (total market sales this year)

total market sales last year


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Chapter-2

Portfolio Analysis

2.1 Use of the BCG matrix in products

The BCG matrix is used for evaluation of a companys product porfolio, it can

also be used to assess key business units such as divisions or individual

companies of a large corporation. Both market share and growth rate are

essential in the assessment of a products value. A products market share and

the rate of its growth vary in time. The producer must therefore manage the

goods lifecycle, the provider must manage the services lifecycle. BCG matrix

analysis results help the organization to identify the strategic plan of the entire

product portfolio so that each of the quadrants contains the products of the

organization. The products in the quadrants must be balanced so that products

defined as cash cows allow for the funding of other products. However, with the

product life cycle, it is necessary to have a future potential in the form of stars

and question marks in the portfolio. On the basis of its specific strategy,

situation and reasons of the position of the products in the quadrants, the

organization must decide on its product strategy. It is appropriate to add to the

model a third dimension of profitability of a product or a service which can be

either high or low. The square thus becomes a three-dimensional cube. Within

the cube, the quadrants which correspond to high profitability are mostsignificant. It is also necessary to consider whether there are reasonable

prospects of high profitability of products or services in the future.

BCG matrix is in practice used very often and it is one of the most practical and

most comprehensible analytical techniques for an organization. It is crucial for

the determination of the correct product strategy of every business.


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Product portfolio:- the range of product a company has in development or

available for consumer at any time. Managing product portfolio is important

for cash portfolio.

Strategic business unit definition :-

Single independent operation of a company has its own competitors.

One manager responsible for the performance.

Product life cycle

Show the stages that product go through from development to withdrawal

from the market.

Each product may have a different life cycle.

Contributes to strategic marketing planning.

Helps to identify when a product needs support redesign withdrawal.

Helps in forecasting and managing cash flow.

Stages in Product life cycle

Development

Introduction/launch

Growth

Maturity

Decline

Withdrawal


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Product life cycle and BCG matrix

Why BCG Matrix?

To access

Profiles of product and business

The cash demand of product

The development cycle of products

Resource allocation and divestment decisions


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Stares

These are promising products for the company, they even can be considered as

leaders of the industry. The strategy is to boost these products by appropriateinvestments to monitor the growth and maintain a position of strength. These

products require a large amount of cash but also contribute to the company's

profitability. They are becoming progressively cash cows with market

saturation.

High Growth, High Market Share stares are leaders in business by having

heavy high market share in a growing market share they also require

heavy investment to maintain its large market share its leads to large

amount of cash consumption and cash generations

Attempts should be made to hold the market share otherwise the star will

become a CASH COW.

Strategy recommendations

Investment

Further Growth

maintain market position

Cash flow

Self sustaining : fund there own growth

require funds from other SBU (Cash Cows)

Assure the future of the company

Grow into the cash cows

Question Marks

They do not generate profits unless the company decides to invest resources to

maintain and even increase the market share (become potential stars). They


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have a high demand for liquidity and the company must ask the question: Invest

or give up the product?

High Growth, Low Market Share Question marks are essentially new products where buyers have yet to

discover them. Most businesses start of as question marks in growing

markets but have low market share

Question marks have high demand and low returns due to low market

share. Investment should be high for question marks

They will absorb great amounts of cash if the market share remains

unchanged

Question marks have potential to become stares and eventually cash cow

but can become also a dog


Investment

increase market share

selectively develop into Stares

Cash Flow

Require Funds From Other SBUs ( cash cows)

Unrealized future opportunities

The marketing strategy is to get markets to adopt this products

These product need to increase their market share quickly or they

becomes a dog.

The best way to handle question marks is to either invest heavily in them

to gain market share or to sell them


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Cash Cow

These are products or services which are mature and which generate interesting

profits and cash, but need to be replaced because the future growth will be

lower. They must therefore be profitable because they can finance otheractivities in progress (including stars and question marks .

Low growth, High Market Share

They are foundations of the company and often the stares of yesterday.

They generate more cash then required.

They extract the profit by investing as littlie cash as possible

They are located in an industry that is mature, not growing or declining


Investment

maintain market share

maintain capacity

Cash Flow

positive cash flow

provides funding to support Stares and ?.

No potential for profit growth

Dogs

These products are positioned in a declining market and highly competitive and

that the company wants to get rid of soon as they become to expensive to

maintain. The company must minimize the dogs . The company must decide

whether it still injects liquidity, otherwise it will eliminate the dogs in the

near future.

Low Growth, Low Market Share


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Chapter-3

Implications and Benefits of BCG Matrix

The BCG matrix provides a framework for allocating resources among different

business units and allows one to compare many business units at a glance.

However, the approach has received some negative criticism for the following

reasons:

The link between market share and profitability is questionable since

increasing market share can be very expensive.

The approach may overemphasize high growth, since it ignores the

potential of declining markets.

The model considers market growth rate to be a given. In practice the

firm may be able to grow the market.

Oversimplifies complex decisions

BCG MATRIX users only two dimensions Market Share and Market

Growth

Only considered current business no dynamics

Does not recognize possible synergies between SBUs

High market share does not mean profits all that time

Business with low market share can be profitable too.

BCG matrix is simple and easy to understand. It helps you to quickly and simply screen the opportunities open to you

and helps you think about how you can make most of them.

Good measurability of market share and growth

Provides information about efficient resources allocation with in the

organization

Generator for strategic option


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It is used to identify how corporate cash resources can best be used to

maximize a companies futures growth and profitability.

Recommendations

Based on the BCG analysis, company has to decide what objective, strategy,

and budget should be assigned to eachSBU.Several general investment

strategies may be recommended. The following strategies are possible:

1. Growth (Build)

For some Question Marks a company may use a growth strategy financed by

Cash Cows The part of the Cash Cows' revenues would strengthen the positions

of Question Marks that have the potential to become Stars. In that case, a

company increases its market share substantially.

2.Maintain position (Hold)

The strong positions of the Stars and the Cash Cows should be maintained.

Also, if the Dogs have a sound size, they may be an important part of a

company's activities. In that case, a maintenance strategy appears also to be

promising.

3.Harvest or milk

The main aim of this strategy is to rise short-term cash flow despite the long-

term consequences. Harvesting implies a decision of getting out of a business

by executing a program of constant cost cutting. Companies use this strategy
http://mfiles.pl/en/index.php/SBUhttp://mfiles.pl/en/index.php/SBUhttp://mfiles.pl/en/index.php/SBUhttp://mfiles.pl/en/index.php/SBU


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when they expect to reduce their cost at faster rate than potential fall in sales.

This strategy is suitable for weak Cash Cows, Question Marks and Dogs. The

recommendation for the Dogs is to milk them and remove them from the

market.

4.Liquidation (Terminate, Divest)

If a company runs a weak business, it should consider weather to harvest or

divest its business units. The decision of liquidation gives a company the

opportunity to reinvest its resources in a more prosperous business. Thisstrategy is appropriate for the Dogs and the rest of the Question Marks, which

are not financed by the Cash Cows.

Limitations of matrix

Characteristic of each SBU will be different in long term.

In BCG matrix, Individuality of product is given less preference,

consideration is given to Strategic Business unit.

There is an assumption that higher rates of profit are directly related to high

rates of market share.

It neglects the effects of synergies between business units.

High market share is not the only success factor.

Market growth is not the only indicator for attractiveness of a market.

Sometimes Dogs can earn even more cash as Cash Cows.

The problems of getting data on the market share and market growth.

There is no clear definition of what constitutes a market.

A high market share does not necessarily lead to profitability all the time.


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Chapter4

REPORT ON CADBURY

History of Cadbury:

Cadbury's as we know it today started from humble beginnings in Bull Street,

Birmingham. A shop was opened by John Cadbury in 1824. It did not start as a

confectionery shop but sold tea and coffee and home made drinking chocolate

or cocoa which he made himself for his customers.

John Cadbury moved into the manufacturing of drinking chocolate and cocoa.

By the early 1840's Cadbury operated from a factory in Bridge Street and went

into partnership with his brother Benjamin. 'Cadbury Brothers of Birmingham'

Cadbury's received a Royal Warrant in 1854 as manufacturers of chocolate for

Queen Victoria.

Cadbury's moved on to become a limited company and after the death of

Richard Cadbury the sons of the two brothers joined the firm headed by George

Cadbury. This was very much a family business in every sense of the word.

In 1969 the Cadbury Group merged with Schweppes. Cadbury Schweppes Plc is

a leader in confectionery and soft drinks both in the UK and abroad. With

factories all over the world and a host of well known brand names it has become

a household name in many countries


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4.1 BANKING SECTOR IN LIBERALIZED PERIOD

The year 1991 marked a decisive changing point in India's economic policy

since Independence in 1947.Following the 1991 balance of payments crisis,

structural reforms were initiated that fundamentally changed the prevailing

economic policy in which the state was supposed to take the "commanding

heights" of the economy. After decades of far reaching government involvement

in the business world, known as the "mixed economy" approach, the private

sector started to play a more prominent role. The enacted reforms not only

affected the real sector of the economy, but

the banking sector as well. Characteristics of banking in India before 1991 were

a significant degree of state ownership and far reaching regulations concerning

among others the allocation of credit and the setting of interest rates. The blue

print for banking sector reforms was the 1991 report of the Narasimham

Committee. Reform steps taken since then include a deregulation of interest

rates, an easing of directed credit rules under the priority sector lendingarrangements, a reduction of statutory pre-emptions, and a lowering of entry

barriers for both domestic and foreign players.

The regulations in India are commonly characterized as "financial repression".

The financial liberalization literature assumes that the removal of repressionist

policies will allow the banking sector to better perform its functions of

mobilizing savings and allocating capital what ultimately results in higher

growth rates .If India wants to achieve its ambitious growth targets of 7-8% per

year as lined out in the Common Minimum Programme of the current

government,a successful management of the systemic changes in the banking

sector is a necessary precondition. While the transition process in the banking

sector has certainly not yet come to an end, sufficient time has passed for an

interim review. The objective of this paper therefore is to evaluate the progress

made in liberalizing the banking sector so far and to test if the reforms have


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allowed the banking sector to better perform its functions. The paper proceeds

as follows: section 2 gives a brief overview over the role of the banking sector

in an economy and possible coordination mechanisms. A discussion of different

repressive policies and their effect on the functioning of the banking sectorfollows in section 3. Section 4 gives a short historical overview

over developments in the Indian banking sector and over the reforms since

1991.

4.2 ROLE AND MANAGEMENT OF THE BANKING SECTOR

A banking sector performs three primary functions in an economy: the

operation of the payment system, the mobilization of savings and the allocation

of savings to investment projects. By allocating capital to the highest value use

while limiting the risks and costs involved, the banking sector can exert a

positive influence on the overall economy, and is thus of broad macroeconomic

importance since the general importance of a banking sector for an economy is

widely accepted, the questions arise under which coordination mechanism

state or marketit best performs its functions, and, if necessary, how to manage

the transition to this coordination mechanism. Currently, there are opposing

views concerning the most preferable coordination mechanism. According to

the development and political view of state involvement in banking, a

government is through either direct ownership of banks or restrictions on the

operations of banks better suited than market forces alone to ensure that the

banking sector performs its functions. The argument is essentially that the

government can ensure a better economic outcome by for example channelling

savings to strategic projects that would otherwise not receive funding or by

creating a branch infrastructure in rural areas that would not be build by profit

maximizing private banks. The active involvement of government thus ensures

a better functioning of the banking sector, which in turn has a growth enhancing


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effect. The proponents of financial liberalization take an opposite stance. In

their view, repressive policies such as artificially low real interest rates, directed

credit programs and excessive statutory pre-emptions that are imposed on banks

have negative effects on both the volume and the productivity of investments.Removing these repressionist policies and giving more importance to market

forces will, in the view of the proponents of financial liberalization, increase

financial development and eventually lead to higher economic growth. A

majority of empirical studies support the conclusion of the financial

liberalization hypothesis. The policy recommendations arising from these

studies are evident: abolishment of repressionist policies and privatization of

state-owned banks.

4.3 DEVELOPMENT OF THE INDIAN BANKING

SECTOR

Development from Independence until 1991

At the time of Independence in 1947, the banking system in India was fairly

well developed with over 600 commercial banks operating in the country.

However, soon after Independence, the view that the banks from the colonial

heritage were biased in favour of working-capital loans for trade and large firms

and against extending credit to small-scale enterprises, agriculture and

commoners, gained prominence. To ensure better coverage of the banking needs

of larger parts of the economy and the rural constituencies, the Government of

India (GOI) created the State Bank of India (SBI) in 1955. Despite the progress

in the 1950s and 1960s, it was felt that the creation of the SBI was not far

reaching enough since the banking needs of small scale industries and the

agricultural sector were still not covered sufficiently. This was partly due to the

still existing close ties commercial and industry houses maintained with the


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established commercial banks, which gave them an advantage in obtaining

credit. Additionally, there was a perception that banks should play a more

prominent role in India's development strategy by mobilizing resources for

sectors that were seen as crucial for economic expansion. As a consequence, in1967 the policy of social control over banks was announced. Its aim was to

cause changes in the management and distribution of credit by commercial

banks.

Following the Nationalization Act of 1969, the 14 largest public banks were

nationalized which raised the Public Sector Banks' (PSB) share of deposits from

31% to 86%. The two main objectives of the nationalizations were rapid branch

expansion and the channelling of credit in line with the priorities of the five-

year plans. To achieve these goals, the newly nationalized banks received

quantitative targets for the expansion of their branch network and for the

percentage of credit they had to extend to certain sectors and groups in

theeconomy, the so-called priority sectors, which initially stood at 33.3%.Six

more banks were nationalized in 1980, which raised the public sector's share of

deposits to 92%. The second wave of nationalizations occurred because control

over the banking system became increasingly more important as a means to

ensure priority sector lending, reach the poor through a widening branch

network and to fund rising public deficits. In addition to the nationalization of

banks, the priority sector lending targets were raised to 40. However, the

policies that were supposed to promote a more equal distribution of funds, also

led to inefficiencies in the Indian banking system. To alleviate the negative

effects, a first wave of liberalization started in the second half of the 1980s. The

main policy changes were the introduction of Treasury Bills, the creation of

money markets, and a partial deregulation of interest rates. Besides the

establishment of priority sector credits and the nationalization of banks, the

government took further control over banks' funds by raising the statutory


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liquidity ratio (SLR) and the cash reserve ratio (CRR). From a level of 2% for

the CRR and 25% for the SLR in 1960, both witnessed a steep increase

until 1991 to 15% and 38.5% respectively. In summary, India's banking system

was at least until an integral part of the government's spending policies.Through the directed credit rules and the statutory pre-emptions it was a captive

source of funds for the fiscal deficit and key industries. Through the CRR and

the SLR more than 50% of savings had either to be deposited with the RBI or

used to buy government securities. Of the remaining savings, 40% had to be

directed to priority sectors that were defined by the government. Besides these

restrictions on the use of funds, the government had also control over the price

of the funds, i.e. the interest rates on savings and loans.This was about to

change at the beginning of the 1990s when a balance-of payments crisis was a

trigger for far-reaching reforms.

Developments after 1991

Like the overall economy, the Indian banking sector had severe structural

problems by the end of the 1980s. Joshi and Little characterize the banking

sector by 1991 as unprofitable, inefficient, and financially unsound. By

international standards, Indian banks were even despite a rapid growth of

deposits extremely unprofitable. In the second half of the 1980s, the average

return on assets was about 0.15%. The return on equity was considerably higher

at 9.5%, but merely reflected the low capitalization of banks. While in India

capital and reserves stood at about 1.5% of assets, other Asian countries reached

about 4-6%. These figures do not take the differences in income recognition and

loss provisioning standards into account, which would further deteriorate the

relative performance of Indian banks.

The 1991 report of the Narasimham Committee served as the basis for the initial

banking sector reforms. In the following years, reforms covered the areas of

interest rate deregulation, directed credit rules, statutory pre-emptions and entry


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deregulation for both domestic and foreign banks. The objective of banking

sector reforms was in line with the overall goals of the 1991 economic reforms

of opening the economy, giving a greater role to markets in setting prices and

allocating resources, and increasing the role of the private sector.

4.4 The most important reforms follows:

Statutory pre-emptions

The degree of financial repression in the Indian banking sector was significantly

reduced with the lowering of the CRR and SLR, which were regardedas one of

the main causes of the low profitability and high interest rate spreads in the

banking system. During the 1960s and 1970s the CRR was around 5%, but until

1991 it increased to its maximum legal limit of 15%. From its peak in 1991, it

has declined gradually to a low of 4.5% in June 2003. In October 2004 it was

slightly increased to 5% to counter inflationary pressures, but the RBI remains

committed to decrease the CRR to its statutory minimum of 3%. The SLR has

seen a similar development. The peak rate of the SLR stood at 38.5% inFebruary 1992, just short of the upper legal limit of 40%. Since then, it has been

gradually lowered to the statutory minimum of 25% in October 1997. The

reduction of the CRR and SLR resulted in increased flexibility for banks in

determining both the volume and terms of lending.

Priority sector lending

Besides the high level of statutory pre-emptions, the priority sector advances

were identified as one of the major reasons for the below average

profitability of Indian banks. The Narasimham Committee therefore

recommendeda reduction from 40% to 10%. However, this recommendation has

not been implemented and the targets of 40% of net bank credit for domestic

banks and 32% for foreign banks have remained the same. While the nominal

targets have remained unchanged, the effective burden of priority sector


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advances has been reduced by expanding the definition of priority sector

lending to include for example information technology companies.

Interest rate liberalizationPrior to the reforms, interest rates were a tool of cross-subsidization between

different sectors of the economy. To achieve this objective, the interest rate

structure had grown increasingly complex with both lending and deposit rates

set by the RBI. The deregulation of interest rates was a major component of the

banking sector reforms that aimed at promoting financial savings and growth of

the organized financial system.

The lending rate for loans in excess of Rs200,000 that account for over 90% of

total advances was abolished in October 1994. Banks were at the same time

required to announce a prime lending rate (PLR) which according to RBI

guidelines had to take the cost of funds and transaction costs into account. For

the remaining advances up to Rs200,000 interest rates can be set freely as long

as they do not exceed the PLR.

On the deposit side, there has been a complete liberalization for the rates of

all term deposits, which account for 70% of total deposits. The deposit rate

liberalization started in 1992 by first setting an overall maximum rate for term

deposits. From October 1995, interest rates for term deposits with a maturity of

two years were liberalized. The minimum maturity was subsequently lowered

from two years to 15 days in 1998. The term deposit rates were fully liberalized

in 1997. As of 2004, the RBI is only setting the savings and the non-resident

Indian deposit rate. For all other deposits above 15 days, banks are free to set

their own interest rates

Entry barriers

Before the start of the 1991 reforms, there was little effective competition in the

Indian banking system for at least two reasons. First, the detailed prescriptions


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of the RBI concerning for example the setting of interest rates left the banks

with limited degrees of freedom to differentiate themselves in the marketplace.

Second, India had strict entry restrictions for new banks, which effectively

shielded the incumbents from competition. Through the lowering of entrybarriers, competition has significantly increased since the beginning of the

1990s. Seven new private banks entered the market between 1994 and 2000. In

addition, over 20 foreign banks started operations in India since 1994. By

March 2004, the new private sector banks and the foreign banks had a combined

share of almost 20% of total assets.

Deregulating entry requirements and setting up new bank operations has

benefited the Indian banking system from improved technology, specialized

skills, better risk management practices and greater portfolio diversification.

Prudential norms

The report of the Narasimham Committee was the basis for the strengthening of

prudential norms and the supervisory framework. Starting with the guidelines

on income recognition, asset classification, provisioning and capital adequacy

the RBI issued in 1992/93, there have been continuous efforts to enhance the

transparency and accountability of the banking sector. The improvements of the

prudential and supervisory framework were accompanied by a paradigm shift

from micro-regulation of the banking sector to a strategy of macro-management.

The Basle Accord capital standards were adopted in April 1992. The 8% capital

adequacy ratio had to be met by foreign banks operating in India by the end of

March 1993, Indian banks with a foreign presence had to reach the 8% by the

end of March 1994 while purely domestically operating banks had until the end

of March 1996 to implement the requirement. Significant changes were also

made concerning non-performing assets (NPA) since banks can no longer treat

the putative 'income' from them as income. Additionally, the rules guiding their


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recognition were tightened. Even though these changes mark a significant

improvement, the accounting norms for recognizing NPAs are less stringent

than in developed countries where a loan is considered nonperforming after one

quarter of outstanding interest payments compared to two quarters in India.

Public Sector Banks

At the end of the 1980s, operational and allocative inefficiencies caused by

the distorted market mechanism led to a deterioration of Public Sector Banks'

profitability. Enhancing the profitability of PSBs became necessary to ensure

the stability of the financial system. The restructuring measures for PSBs were

threefold and included recapitalization, debt recovery and partial privatization.

Despite the suggestion of the Narasimham Committee to rationalize PSBs, the

Government of India decided against liquidation, which would have involved

significant losses accruing to either the government or depositors. It opted

instead to maintain and improve operations to allow banks to create a good

starting basis before a possible privatization. Due to directed lending practices

and poor risk management skills, India's banks had accrued a significant level of

NPAs. Prior to any privatization, the balance sheets of PSBs had to be cleaned

up through capital injections. In the fiscal years 1991/92 and 1992/93 alone, the

GOI provided almost Rs40 billion to clean up the balance sheets of PSBs.

Between 1993 and 1999 another Rs120 billion were injected in the nationalized

banks. In total, the recapitalization amounted to 2% of GDP. In 1993, the SBI

Act of 1955 was amended to promote partial private shareholding. The SBI

became the first PSB to raise equity in the capital markets. After the 1994

amendment of the Banking Regulation Act, PSBs were allowed to offer up to

49% of their equity to the public. This lead to the further partial privatization of

eleven PSBs. Despite those partial privatizations, the government is committed

to keep their public character by maintaining strong administrative control such

as the ability to appoint key personnel and influence corporate strategy. After an


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overview of the developments in the Indian banking sector overthe last years,

the next section tries to measure the changing degree of finance until 1991 to

15% and 38.5% respectively.

4.5 CHALLENGES FACED BY INDIAN BANKING

INDUSTRY

Developing countries like India, still has a huge number of people who do not

have access to banking services due to scattered and fragmented locations. But

if we talk about those people who are availing banking services, their

expectations are raising as the level of services are increasing due to the

emergence of Information Technology and competition. Since, foreign banks

are playing in Indian market, the number of services offered has increased and

banks have laid emphasis on meeting the customer expectations. Now, the

existing situation has created various challenges and opportunity for Indian

Commercial Banks. In order to encounter the general scenario of banking

industry we need to understand the challenges and opportunities lying with

banking industry of India.

RuralMarket

Banking in India is generally fairly mature in terms of supply,product

range and reach, even though reach in rural India still remains a challenge

for theprivate sector and foreign banks. In terms of quality of assets

and capitaladequacy, Indianbanks are considered to have clean, strong

and transparent balance sheets relative to other banks in comparable

economies in its region.Consequently, we have seen some examples of

inorganic growth strategy adopted by some nationalized and private

sector banks to face upcomingchallenges inbanking industry of India.

For example recently, ICICI Bank Ltd.merged the Bank ofRajasthan Ltd.

in order to increase its reach in rural marketandmarketsharesignificantly.


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emerging environment. Banks are expected to be more responsive and

accountable to theinvestors.Bankshave todisclose in theirbalancesheets

aplethoraofinformationon the maturityprofiles of assets and liabilities,

lending to sensitive sectors, movements in NPAs, capital, provisions,shareholdings of the government, valueof investment in India and abroad,

operating andprofitability indicators, the total investments made in the

equity share, units of mutual funds,bonds, debentures,aggregateadvances

againstsharesandsoon.

HumanResourceManagement

Significant correlations were foundbetween work climate, human resource

practices, and business performance. The results showed that the

correlationsbetween climate and performance cannot be explained by

their common dependence on HRM factors, and that the data are

consistent with a mediation model in which the effects of HRM

practices on business performance are partially mediated by work

climate. The relationship between human resource management and

establishmentperformance of employees on the manufacturingsector. The

HRM environment could vary across branches. Site visits provided

specific examples of managerial practices that affected branch

performance. An analysis of responses to the banks employee attitude

survey that controls for unobserved branch and manager characteristics

shows a positive relationship between branch performance and

employees satisfaction with the quality of performance evaluation,

feedback, and recognition at thebranchthe incentivesdimension of a

high-performance work system. In some fixed effectsspecifications,

satisfaction with the quality of communications at the branch was also

important.


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GlobalBanking

It ispractically and fundamentally impossible for any nation to exclude

itself from world economy. Therefore, for sustainable development, one

has to adopt integration process in the form of liberalization andglobalization as India spread the red carpet for foreign firms in 1991.

The impact of globalization becomes challenges for the domestic

enterprises as they arebound to competewithglobalplayers.Ifwe lookat

the Indian Banking Industry, then we find that there are 36 foreignbanks

operating in India, whichbecomes a major challengeforNationalized and

private sector banks. These foreign banks are large in size, technically

advancedandhavingpresenceinglobalmarket,whichgivesmoreandbetter

optionsandservicestoIndiantraders.

FinancialInclusion

Financial inclusion has become a necessity in todays business

environment. Whatever is produced by business houses, that has to be

under the check from various perspectives like environmental

concerns, corporategovernance, social and ethical issues.Apart from it to

bridge the gapbetween rich and poor, the poor people of the country

shouldbe givenproper attention toimprovetheireconomiccondition.

EmployeesRetention

Thebanking industry has transformed rapidly in the last ten years, shifting

from transactional and customer service-oriented to an increasingly

aggressive environment, where competition for revenue is on toppriority.

Long-timebankingemployees arebecomingdisenchanted with the industry

and are often resistant to perform up to new expectations. The

diminishing employee morale results in decreased revenue. Due to the


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half of bankers said that the major functions performed by performance

management are setting goals and performance standards, communication,

coaching feedback, performance appraisal and development planning for future.

5.2 Suggestions

The present business environment for banking is highly volatile and uncertain.

It is highly competitive and every bank is finding difficult to service grow,

stabilize and excel in banking business. Further, for better performance

management must keep watch on the emerging trends in business environment.

The proper and timely strategies are to be adopted to improve efficiency of the

whole organization Competition is faced from public, private, foreign and

cooperative banks. They have adopted the strategy for effective workings are

use of advance technology and changes in working procedure. No doubt

performance has been improved but manpower is not maintained and utilized

properly. For improvement in human resources, special focus should be given

on selection, training, motivate career opportunities or employees etc.

5.3 Conclusion

We are in the era of globalization and the business environment is very

turbulent. It is changing drastically. In present environment nothing is

permanent except changes. Changes are likely to take place but with different

pace at different time. External environmental factors like social, cultural,

economic, legal, government policies, technology and competition are

uncontrollable. Due to these, it has become very difficult to carry out the

business activities effectively and efficiently. It is an uphill task to stabilize,

grow and excel in the business performance. In this situation, the need for

higher level of knowledge and skills are needed. Every organization whether big

or small, is using manpower, machine, money and materials. To carry out its

tasks these are needed and without these the tasks cannot be completed. In


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present scenario under liberalization, privatization and globalization the

companies are facing stiff competition. It has become very difficult to survive,

grow, stabilize and excel in the business. The companies performing better and

before others are taking the lead in business. To do so the skilled and motivatedemployees are strongly needed. They can give more output per person. Their

performance can be measured with the help of labour productivity concept. The

labour efficiency can be measured with the help of productivity concept.

BIBLIOGRAPHY

TITLE AUTHOR PUBLISHER

Indian banking System T.A.Vaswani

Lalvani Publishing House

Banking System Beckhart B.H

The Role of the central

banks today

Rasminsky Louis


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WEBLIOGRAPHY

Reserve Banks Publication

(i) Function and working of the RBI

(ii) Annual report of the bank

News papers Magazine

Hindustan times Indian banks Association

Times of India The Banker

Business Times The Banks Mag

Websites Purpose

www.rbi.com Reserve Bank of India Government

Agency

http://www.iibf.org.in/ Indian Institute of Banking and

Finance
http://www.rbi.com/http://www.rbi.com/http://www.iibf.org.in/http://www.iibf.org.in/http://www.iibf.org.in/http://www.rbi.com/


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https://www.nabard.org/ The Banking Regulation Act-1949

http://www.bankingindiaupdate.com Banking in India

http://en.wikipedia.org All Indian Banking Information

www.slashdocs.com Pdf and Ppt on banking sector and

Word Document

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